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Credit Suisse’s Farhan Ahmad believes Mentor Graphics CorpMENT 0.95% is well positioned to witness a cyclical recovery in CY2017 and that the Street is underestimating the company’s growth potential.

Ahmad initiated coverage of the company with an Outperform rating and price target of $34.

Compelling Valuation

The analyst mentioned that Mentor Graphics was a market leader in physical verification and PCB design, and its stock valuation was more attractive that the broader semi/semicap space, with upside potential as the company begins to deliver on growth.

“MENT also screens well as a potential target for Systems Design Software companies, leading to optionality value that isn’t yet priced in,” Ahmad stated.

The analyst explained that Mentor Graphics recognizes its revenues upfront, which results in higher variability of revenues on a yearly basis, and that an analysis of contract renewal timing implies that there was potential for upside to software revenues in FY18.

Acquisition Potential

“Due to its upfront revenue recognition, MENT was the first to suffer from the cyclical Semi downturn and the impact from Semi M&A. We expect the company to benefit most from the improvement in the Semi cycle,” Ahmad went on to say.

Given the increasing important of EDA companies in systems design, the analyst believes that there was a high likelihood of Mentor Graphics being acquired by broader engineering software companies, and that there could be significant upside in the event of an acquisition.

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